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What’s happening with investments in work comp services?

The investment community’s interest in workers’ comp remains high. Not as high as it was a few years back when deals came almost every month, but high nonetheless. What’s different is the size of the investments we’re seeing – which isn’t a surprise.

As the industry consolidates, the companies in the sector get fewer and bigger – so the buyers these days tend to be either big “strategics” (companies in related businesses or in sectors that can create additional value via acquisition) or the relatively few very large private equity firms – many of which are already invested in the space.

We are also seeing wiser buyers.

Not smarter – almost all the people I’ve dealt with in private equity and investment banking are really intelligent – but many don’t have the wisdom that comes from experience in this space.

This wisdom comes from experience; some transactions haven’t quite worked out the way the investors thought, for reasons both predictable and not (OneCall, York, Bunchcare, MSC’s pharmacy business).  A few have worked out really well, but not because the core business idea and execution thereof was brilliant but rather because the owner found some other investment firm to buy the asset (OneCall Imaging, initial York transaction).

This is a good thing.

A few years ago pretty much any company in the work comp space was a hot commodity, which is why we ended up with some deals that weren’t “deals” at all. Today, buyers are a whole lot wiser, ask way better questions, dig way deeper into stuff that matters, and perhaps most significantly, spend a lot of time getting to know management. 

So, where are the opportunities these days?

  • Telemedicine. This is going to be a major disrupter, impacting case management, rehab, physician visits, and more things we haven’t thought of yet. Collateral impacts will include:
    • systems connectivity (sending, sorting, and indexing video),
    • regulatory catch-up (some states are a long way from being ready, others are the wild west, and most are trying to predict the future)
    • stakeholder roles – changing who provides what services when to which claimants
  • Outsourced claims. TPAs are going to do well.
  • Agile, service focused companies – Companies, many run by folks who sold their businesses a few years back, are focusing on traditional niche business sectors. These will be smaller transactions, but valuations will be solid.

What’s going to hold things up?

Owner expectations. Many of the owners I talk with have unrealistic expectations – they think their businesses are worth more than buyers will pay. That’s understandable; it’s also why we may see a hiatus as those expectations aren’t met, and sellers slowly acclimate to the idea that a 14x trailing earnings valuation isn’t going to happen for their company (which has decent but not great growth).

What does this mean for you?

Build your business around customer service, differentiate your brand, and you’ll do well.

2 thoughts on “What’s happening with investments in work comp services?”

  1. Hi Joe,

    Thanks for the post and insight. You imply that multiples in the space should no longer command what they once did. You even point out a specific data point of 14x as unobtainable, yet MedRisk, a business that has been a client of yours, is in the midst of a transaction which is rumored to be trading north of 14x. Is MedRisk’s model unique enough where they deserve a multiple far higher than all peers and tangential businesses, or are you implying that Carlyle is paying too much.

    Appreciate any thoughts!

    1. CK thanks for the question.
      I can’t comment on Medrisk or Carlyle.

      My valuation comment was specific to the type of companies described in that paragraph. Most of the companies that might be the target for acquisition are – in my opinion – overvalued by their current owners.

      Make sense?

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Joe Paduda is the principal of Health Strategy Associates




A national consulting firm specializing in managed care for workers’ compensation, group health and auto, and health care cost containment. We serve insurers, employers and health care providers.



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